The Federal Housing Administration may need bailing out

Another of FDR’s New Deal creatures is on the verge of needing bailed out. Spawned as part of the National Housing Act of 1934, the Federal Housing Administration (FHA) insures loans made by banks and other private lenders for home buying and building. Of course, FHA is not really engaged in a legitimate insurance business. As Murray Rothbard explains,

Insurance properly applies to risks of future calamity that are not readily subject to the control of the individual beneficiary, and where the incidence can be predicted accurately in advance. “Insurable risks” are those where we can predict an incidence of calamities in large numbers, but not in individual cases: that is, we know nothing of the individual case except that he or it is a member of a certain class.

Rothbard goes on to explain that if the adverse event is within the control of the individual beneficiary, moral hazard becomes an issue. Insurable risks are homogeneous and the number can be determined by an actuarial. On the other hand, events on the market are heterogeneous, not random at all, but instead influence each other, and thus, not insurable at all.

Not to mention, no legitimate insurance company would remain in business maintaining reserves against claims of only two percent.

With the housing market crash continuing on government time, it should be no surprise that the FHA’s cash reserves have fallen to such a level that the odds are 50-50 the agency will run out of money and be looking to the Treasury to keep its doors open. Nick Timiraos reports for the Wall Street Journal,

The audit, to be released Tuesday by the FHA, estimated that the value of the agency’s reserves stood at $2.6 billion as of Sept. 30, down 45% from an already low $4.7 billion last year. The drop reflects the impact of rising home-loan defaults amid falling home prices, which together generate greater losses on the sale of foreclosed homes.

The FHA insures $1.1 trillion in mortgages. Federal law requires the FHA to have reserves above 2 percent, meaning the agency is supposed to have over $22 billion in reserves on hand. It has just over 10 percent of what’s required.

Timiraos writes that a 9 percent drop in housing prices next year will send the agency to the Treasury needing $13 billion. A 20 percent decline will require $43 billion from Treasury.

Robert Shiller predicts housing prices will drop 10 to 25 percent between now and 2014, swamping any 3.5 percent down payment FHA requires.